Pre-Brexit Britain decides now's the right time to pick a digital tax fight with the US tech sector

As the European Union attempts to reach a consensus on taxing online giants next week, the UK has decided to go-it-alone, prompting the prospect of conflict with the Trump White House even as it seeks to establish a post-Brexit trade deal.

In what has been widely condemned by the UK tech sector, the UK Chancellor of the Exchequer Philip Hammond yesterday took the politically-pleasing decision to get tough with the likes of Amazon and Facebook and impose a UK-specific Digital Services Tax.

As part of his Budget speech, Hammond admitted that the best option to tackle tax anomalies would be a global approach, but declared:

But progress is painfully slow. We cannot simply talk forever. So we will now introduce a UK Digital Services Tax. This will be a narrowly-targeted tax on the UK-generated revenues of specific digital platform business models.

It will be carefully designed to ensure it is established tech giants – rather than our tech start-ups - that shoulder the burden of this new tax…The Digital Services Tax will only be paid by companies which are profitable and which generate at least £500 million a year in global revenues in the business lines in scope.

Hammond said that if a global solution emerges from the G20 or from the OECD, then he would “consider” adopting that rather than his own tax, which will come into effect in April 2020.

Hammond claims that the new tax - which will be 2% of UK-generated revenues - will raise “over £400 million a year”, although the UK Office for Budget Responsibility poured cold water on that in its own costings. These show that the £400 million claim won’t be realised until the 2022/2023 tax year, with a more realistic initial number being £275 million.

Opposition

The announcement was clearly aimed at the Amazons and Facebooks of the world, but there are wider implications. Hammond says the tax will be skewed towards social media platforms, online marketplaces and search engines.

But the detail to date fails to define the scope of digital services and as such the potential cost facing firms such as Salesforce and Microsoft, both of which have invested heavily in the UK.

With the UK seeking post-Brexit inward investment from the digital sector, the new tax is a major concern to tech trade organizations such as techUK. CEO Julian David pulled no punches, agreeing with the idea that the proposed tax is “the wrong idea:.

techUK remains opposed to any tax that seeks to narrowly target businesses simply because they are digital. The kind of tax being proposed will be bad for investment and bad for the UK economy…This approach risks undermining the UK’s reputation as the best place to start a tech business or to invest. The £500 million threshold the Chancellor proposed is low and risks capturing much smaller companies than anticipated…it is vital that policy is developed based on the reality of how businesses work, not on theoretical models of how they operate.

And to introduce new tax measures aimed primarily at US firms as the UK seeks to do Brexit deals is foolish, according to Russ Shaw, founder of Tech London Advocates. He’s quoted as stating:

Brexit, with all its uncertainties, is bringing enough economic disruption as it is. Tackling the digital tax question without coordinating efforts with the US and EU as key global partners, will only further entrench Britain in an isolationist position we cannot afford.

Europe

Hammond’s decision to take unilateral action comes as the European Commission’s efforts to get consensus on a 3% tax on digital sales and services steps up a notch. Led by the Macron government in France, the EC reckons such a tax would raise €5 billion a year.

The necessary consensus isn’t there yet. The Commission reckons that it has the support of 20 of the 28 European Union member states. But the likes of Ireland, the Czech Republic, Sweden and Finland remain stubbornly opposed to the plans. Ireland, which has made life as easy as possible for tech inward investment estimates that it would lose up to €160m a year in tax revenue if the plans go ahead in their current form.

French Finance Minister Bruno Le Maire met his German counterpart Olaf Scholz last week to try to secure agreement prior to a debate on the proposals next week. He emerged from that meeting to declare:

I think a compromise in the coming weeks is possible and we will be able to send the clear message that we agree on a fair taxation of the internet giants. We made real progress today. I remain confident that we can deliver by the end of the year.

But the German government has yet to indicate that it’s convinced. It will also be conscious that Germany’s leading industry association, the Federation of German Industries, has come out in the strongest terms against the proposed tax, saying it would damage German industry and undermine adoption of digital business models.

Quite what the Macron government and the wider EU advocates of the tax plans will make of the UK breaking out of the pack remains to be seen. But it’s unlikely to make life any easier in Brexit negotiations, with Hammond effectively stealing Macron’s pet idea.

Then there’s the question of what the response of a US administration that regards the EU as one of its enemies will make of the UK move? The White House has made clear its opposition to the wider EU plans, with Treasury Secretary Steven Mnuchin stating that they would unfairly" penalise US technology companies:

We believe the issues are not unique to technology companies but also relate to other companies, particularly those with valuable intangibles. I highlight again our strong concern with countries’ consideration of a unilateral and unfair gross sales tax that targets our technology and internet companies.

Donald Trump may hate Amazon, but foreign governments picking on US tech firms isn’t going to get a pass in the Oval Office.

My take

Political grandstanding by Hammond that achieved its purpose - lots of approving “Amazon bashing” headlines in the right wing press. This is a pre-Brexit move that plays to the peanut gallery, but which is insane at a time when the UK is trying to win inward investment and bolster a domestic digital economy.

I’m as angry as anyone else at the paltry levels of tax paid in the UK by the likes of Facebook and Amazon, but this is not the way to tackle that. The French-led EU efforts are equally flawed and open to charges from anti-Americanism in Washington.

This is a global issue that needs to be dealt with at a global level. That’s going to take time inevitably, but the offices of the OECD are the best way to tackle this. Enjoy today’s headlines, Chancellor - the payback on this folly will come at a high cost for the UK.